Chancellor John Healey’s fiscal headroom faces being wiped out entirely by the Iran war, according to EY analysis that shows the buffer against the government’s borrowing target has already fallen to £11bn and could disappear altogether if the conflict drags into next year. The assessment underlines how far the public finances have come to depend on events well beyond Whitehall’s reach.
EY’s central forecast puts the headroom figure at £11.3bn, a calculation built on the assumption that the Strait of Hormuz, the Gulf trading route critical for a fifth of global oil and gas supplies, reopens around the time of the Budget. Should the war continue until the middle of next year, the firm estimates that a further £18bn would be stripped from the fiscal forecast, leaving Healey with no buffer at all.
Healey fiscal headroom Iran scenarios: from £40bn surplus to a £7bn deficit
EY has set out a wide range of possible outcomes. Under its adverse scenario, where inflation hits six per cent and activity across the UK economy dramatically slows, the Chancellor would face a deficit of £7bn in the current budget for 2029/30. The fiscal rules require that day-to-day spending be covered by tax receipts in the third year of the Office for Budget Responsibility’s forecast window, so a deficit of that scale would represent a breach of his own stated targets.
At the other end of the range, a fall in unemployment could deliver stronger earnings growth, pushing tax receipts higher sooner than expected. EY suggests that outcome could lift the headroom to about £40bn, a figure that would give the Chancellor far more room to absorb future pressure.
The range reflects how exposed the UK’s position has become. Mats Persson, EY’s macro and geostrategy analyst, said the forecast judgement showed ‘how exposed the UK’s fiscal position has become to events well beyond its borders’. He added: ‘Energy market disruption originating in the Middle East has fed through into inflation, growth and borrowing costs, and UK gilt yields have reached their highest levels this century.’
Energy prices and the growth outlook
The scale of the disruption to global energy markets gives weight to EY’s concern. According to UK Parliament Research Briefings, the International Energy Agency estimated in mid-March 2026 that around 20 million barrels of oil per day had been affected by the drop in shipping through the Strait of Hormuz, with oil production in Gulf countries cut by at least 10 million barrels, equivalent to roughly 10 per cent of global output. UK wholesale natural gas prices rose by roughly 75 per cent between late February and 23 March 2026, the same source notes. Oil prices have been hovering around the $100 per barrel mark, deepening pessimism in bond markets and pushing gilt yields higher.
Against that backdrop, EY has raised its UK growth forecast to 0.9 per cent, though Oil Price reports that the firm cautions the figure depends on the Strait of Hormuz reopening and global energy supplies stabilising. If the Strait remains shut, Yahoo Finance UK reports EY’s economic outlook warns that GDP could slow to 0.5 per cent this year and contract by 0.2 per cent next year, a sharp deterioration from the central case.
Persson was direct about what the government can and cannot control. ‘The geopolitical backdrop may be outside the government’s control,’ he said, ‘but strengthening the supply side of the economy, such as by unlocking stronger productivity or creating the conditions for sustained business investment, would build capacity to help absorb external shocks.’ He described that as ‘a longer-term agenda than any single budget’ but said it would ‘ultimately determine how much room future chancellors have to work with.’
The OBR is expected to offer its own assessment of the UK’s position at the Budget, with the energy situation in the Strait of Hormuz likely to be a central variable in whatever assumptions it publishes.
